BIR Ruling [DA-489-99]

August 26, 1999 BIR RULING [DA-489-99] Television International Corporation 2nd Floor, Sagittarius Building H.V. dela Costa St., Salcedo Village Makati City Attention: Atty . Lyndy R . Reyes Corporate Secretary Gentlemen : This refers to your letter dated July 7, 1999 stating that in 1988, Television International Corporation (TIC) purchased from Justitia Realty and Management Corporation (JRMC) two (2) condominium units more particularly described as 5th Floor, Sagittarius Bldg., II, H.V. dela Costa St., Salcedo Village, Makati City containing a total area of 481.2 sq.m. and covered by TCT Nos. 11617 and 11618 issued by the Registry of Deeds of Makati City; that TIC actually bought the 4th Floor of said condominium building containing also an area of 481.2 sq.m. because the Majent Group to which TIC belongs or is a part of, already owns the entire 2nd and 3rd Floors of the Sagittarius Condominium and TIC buying the 4th Floor would result in the contiguous ownership of the Majent Group of the 2nd, 3rd and 4th Floors of the Sagittarius Condominium; that TIC at the time, however, did not immediately occupy the units until it was issued the Title; that, however, when the Title was transferred and issued in the name of the TIC, the Title given pertains to the 5th Floor unit which actually at that time was bought by GMA Networks, Inc.; that when TIC called the attention of JRMC about the error (as certified to by JRMC in a certification dated July 9, 1999), the Republic Broadcasting Systems, Inc., now known as GMA, was already occupying and has the Title to the said 4th Floor Unit; that both GMA and TIC agreed to correct the error as soon as they had no use or had vacated the units they are now occupying; that last May 1999, GMA vacated the 4th Floor; and that because of this, both TIC and GMA agreed to exchange their Titles. Based on the foregoing representations and documents submitted, you are now requesting exemption from the payment of the capital gains tax (creditable withholding tax), value-added tax and documentary stamp tax on the proposed exchange between TIC and GMA of the 5th and 4th Floors of the Sagittarius Condominium for the following reasons: 1. That the exchange was the result of rectifying a previous error made. 2. The exchange units are located in the same building and have exactly the same floor area, same address, same zonal value and same market-assessed value. 3. The exchange will not materially benefit any of the parties involved. In reply, please be informed that Section 2.57.2(J) of Revenue Regulations No. 2-98 implementing Section 57(B) of the Tax Code of 1997 provides that: there shall be withheld a creditable income tax at the rate of 7.5% based on the gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property, other than capital assets sold by an individual, estate, trust, trust fund, or pension fund or by a corporation who is not actually engaged in the real estate business. In an exchange, gross selling price shall mean the fair market value of the property received in exchange, as determined in the Income Tax Regulations shall be used. From the foregoing provision of Section 2.57.2 of Revenue Regulations No. 2-98, it would seem that the proposed exchange transaction is subject thereto, both realties being ordinary assets. However, considering that such exchange transaction would be entered into by TIC and GMA merely for the purpose of rectifying the error committed on the part of the seller, JRMC, which delivered the 5th floor of the Sagittarius Condominium to TIC instead of the 4th Floor which is actually bought and delivered to GMA the 4th Floor instead of the 5th Floor, which at about the same time likewise bought the 5th Floor of the same Condominium Building. Thus, the real object of the Contract of Sale between TIC and JRMC and GMA and JRMC are not reflected in the Deeds executed by them. Accordingly, it is believed that the proposed exchange transaction by and between TIC and GMA of the 5th Floor covered by CCT Nos. 11617 and 11618 under the name of GMA and the 4th Floor covered by CCT Nos. 11718 and 11719 under the name of TIC is not subject to the creditable withholding tax nor to the capital gains tax because both realties are classified as ordinary assets, the same being used in business by both TIC and GMA, and to the value-added tax (VAT), being an isolated transaction and not sold or exchanged in the ordinary course of business. (BIR Ruling No. UN-110-97 dated March 19, 1997; DA-240-99 dated April 15, 1999) Moreover, the deed to be executed for the purpose is not likewise subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, since the same will be executed without any valuable consideration, which under Section 185 of Revenue Regulations No. 26, otherwise known as the "Revised Documentary Stamp Tax Regulations", conveyance without valuable consideration is not taxable. However, the acknowledgment on said Deed is subject to a documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling Nos. DA-240-99 dated April 15, 1999; UN-115-97 dated March 19, 1997) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)